Berkshire Hathaway 1998 Annual Report Download - page 28

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(1) Significant accounting policies and practices (Continued)
(f) Insurance premiums
Insurance premiums for prospective insurance and reinsurance policies are earned in proportion to the level
of insurance protection provided. In most cases, premiums are recognized as revenues ratably over their
terms with unearned premiums computed on a monthly or daily pro rata basis. Consideration received for
retroactive reinsurance policies, including structured settlements, is recognized as premiums earned at the
inception of the contracts. Premiums earned are stated net of amounts ceded to reinsurers. Earned
premiums ceded were $93 million in 1998, $86 million in 1997 and $79 million in 1996.
(g) Insurance premium acquisition costs
Certain costs of acquiring insurance premiums are deferred, subject to ultimate recoverability, and charged
to income as the premiums are earned. The recoverability of premium acquisition costs of direct insurance
businesses is determined without regard to investment income. The recoverability of premium acquisition
costs from reinsurance assumed businesses, generally, reflects anticipation of investment income. The
unamortized balances of deferred premium acquisition costs are included in other assets and were $666
million and $127 million at December 31, 1998 and 1997, respectively.
(h) Losses and loss adjustment expenses
Liabilities for unpaid losses and loss adjustment expenses represent estimated claim and claim settlement costs
of property/casualty insurance and reinsurance contracts. The liabilities for losses and loss adjustment
expenses are recorded at the estimated ultimate payment amounts, except amounts arising from certain
reinsurance assumed businesses are discounted. Estimated ultimate payment amounts are based upon (i)
individual case estimates, (ii) estimates of incurred-but-not reported losses, based upon past experience and
(iii) reports of losses from ceding insurers.
The estimated liabilities of certain workers’ compensation claims assumed under reinsurance contracts and
liabilities assumed under structured settlement reinsurance contracts are carried in the Consolidated
Balance Sheets at discounted amounts. Discounted amounts pertaining to reinsurance of certain workers’
compensation risks are based upon an annual discount rate of 4.5%. The discounted amounts for structured
settlement reinsurance contracts are based upon the prevailing market discount rates when the contracts
were written. The periodic accretion of discounts is included in the Consolidated Statements of Earnings
as a component of losses and loss adjustment expenses incurred.
(j) Deferred charges re reinsurance assumed
The excess of estimated liabilities for claims and claim costs payable by the Insurance Group over the
consideration received with respect to retroactive property and casualty reinsurance contracts that provide
for indemnification of insurance risk is established as a deferred charge at inception of such contracts. The
deferred charges are subsequently amortized using the interest method over the expected settlement periods
of the claim liabilities. The periodic amortization charges are reflected in the accompanying Consolidated
Statements of Earnings as losses and loss adjustment expenses. The unamortized balance of deferred
charges is included in other assets and was $560 million at December 31, 1998 and $480 million at
December 31, 1997.
(k) Reinsurance
Provisions for losses and loss adjustment expenses are reported in the accompanying Consolidated Statements
of Earnings after deducting amounts recovered and estimates of amounts that will be ultimately recoverable
under reinsurance contracts. Reinsurance contracts do not relieve the ceding company of its obligations to
indemnify policyholders with respect to the underlying insurance and reinsurance contracts. Estimated
losses and loss adjustment expenses recoverable under reinsurance contracts are included in receivables and
totaled $2,167 million and $274 million at December 31, 1998 and 1997, respectively.